Taxes deductions for Rental Property

[Reemo Petteway]

Hello All!

I purchased a rental property in 2020 and started an LLC. I renovated the house at the end of 2020 and moved in a tenant early 2021. Can I claim the expenses of renovating the home on my 2020 taxes? I have heard that since it is a "passive" and not "active" business that I would not be able to claim those expenses for 2020yr taxes.

I hired contractors but also did a significant portion of the work myself as well as property management (advertising, screening tenants, software mgmt, etc.)

Thanks for an insight anyone can provide!

[Joe Splitrock]

Originally posted by @Reemo Petteway:

Hello All!

I purchased a rental property in 2020 and started an LLC. I renovated the house at the end of 2020 and moved in a tenant early 2021. Can I claim the expenses of renovating the home on my 2020 taxes? I have heard that since it is a "passive" and not "active" business that I would not be able to claim those expenses for 2020yr taxes.

I hired contractors but also did a significant portion of the work myself as well as property management (advertising, screening tenants, software mgmt, etc.)

Thanks for an insight anyone can provide!

 You should be able to claim these expenses as added to basis. Basis is the purchase price of the property, minus land value plus improvements. Renovations are capital expenditures which is why they are depreciated with the property. Your labor is not included, so all you can claim is materials or costs paid to third party contractors. Since the property was advertised and leased in 2021, the "in service" date will be 2021. All the expenses from 2020 will basically be claimed in 2021 as part of basis. Have a tax professional go through your expenses to categorize and establish basis. 

It is correct that this is a passive business even though you were active. I am assuming you already filed your 2020 taxes anyways, so unless you amend your return, it is probably too late.